On Friday, March 6, the U.S. government’s development bank, the U.S. International Development Finance Corporation (DFC), and the Treasury Department announced the establishment of a $20 billion reinsurance mechanism aimed at restarting shipping in the Strait of Hormuz in the Middle East.
Prior to this, President Trump directed the establishment of a “fair price” political risk insurance and financial security mechanism to ensure that vessels transporting energy can freely pass through the Strait of Hormuz. Trump stated that if necessary, the U.S. Navy would escort oil tankers through the strait.
DFC CEO Ben Black and Treasury Secretary Scott Bessent announced the mechanism on Friday.
Since February 28, following the outbreak of military conflict between the U.S.-Israel and Iran, Iran has been continuously attacking energy facilities in the Gulf region and vessels passing through the Strait of Hormuz. So far, at least nine vessels have been retaliated against by Iran in the waterway, effectively blockading the shipping in the Strait of Hormuz.
According to data from Vortexa and ship tracking company Kpler, there are still approximately 300 oil tankers stranded in the strait.
The multinational naval advisory organization, the United Maritime Information Center, has stated that commercial traffic in the Strait of Hormuz has “almost completely” stalled, attributing the traffic paralysis to “security threats, insurance restrictions, operational uncertainties, and actual disruptions.”
It is reported that commercial marine insurance companies are increasing premiums on this route and even canceling war risk insurance for tankers passing through the area.
Black introduced on Friday that the mechanism will initially provide up to $20 billion in insurance on a rolling basis, aiming to “restore confidence in maritime trade, help stabilize international markets, and support U.S. and allied businesses operating in the Middle East during the conflict with Iran.”
DFC will closely coordinate with U.S. Central Command responsible for U.S. military operations in the Middle East regarding this matter.
“In cooperation with Central Command, DFC’s insurance support will provide security that other policies cannot match,” Black stated in a release. “We are confident that the U.S. reinsurance plan will ensure the smooth passage of oil, gasoline, liquefied natural gas, aviation fuel, and fertilizers through the Strait of Hormuz, once again flowing worldwide.”
A DFC official stated that the reinsurance mechanism will provide a total of $20 billion in reinsurance at specified points in time, with the possibility of the amount increasing over time.
DFC has identified the insurance companies participating in the project.
The world’s largest marine insurance organization, Lloyd’s of London, stated on Thursday that they are in discussions with the U.S. government regarding the plan.
However, the insurance industry has previously questioned whether DFC can bear the immense risk of vessels crossing the Gulf.
J.P. Morgan stated that DFC can only access $154 billion, while the total amount needed to fully insure the 329 oil tankers in the region amounts to $352 billion, covering oil pollution, salvage, hull, and third-party liability in case of total loss of vessels.
According to J.P. Morgan, DFC’s statutory liability cap is $205 billion, with the cap lasting until 2031, and by the end of 2025, DFC had utilized $51 billion.
The Financial Times reported that a DFC official objected to J.P. Morgan’s assessment, stating that J.P. Morgan is considering a broader range of insurance coverage.
Based on DFC’s latest statement, the insurance will initially focus on coverage for hulls, machinery, and cargo.
The official mentioned that this financing mechanism would only be needed for vessels in conflict zones over a shorter period of time. DFC is developing criteria for vessel types eligible for the protection of this mechanism.
“We are adjusting specific policies based on market requirements to restart maritime trade,” the official said.
He added that the facility would help alleviate high insurance premiums, with the U.S. Navy providing necessary security to boost captains’ confidence at sea.
During the Gulf War in the 1980s, Kuwaiti oil tankers were escorted out of the Strait of Hormuz under the protection of over 30 U.S. destroyers.